March 18, 2010

European Airlines Seek to Tap Loan Guarantees

Nine top European airlines, including Air France-KLM SA, British Airways PLC and Germany’s Deutsche Lufthansa AG, are lobbying to shake up how airplane sales are financed so they can gain access to government export guarantees used by most other airlines around the world.

The effort is a spillover from the credit crisis of late 2008 that could potentially roil the global aviation market. Last year, some $20 billion of subsidized guarantees helped finance more than 30% of the 979 jetliners delivered by Europe’s Airbus and Boeing Co. of the U.S.

Airlines behind the lobbying push, which depend on commercial financing and have seen lending rates rise since the credit crisis, say the government guarantees give their rivals a boost of several million dollars per airplane.

The nine carriers are from France, Germany, Britain and Spain, the home countries of Airbus. They want to rework a longstanding agreement between the U.S. and the European Union that limits which carriers can benefit from government-backed export financing.

The deal, known as the home-market rule, forbids airlines from the home countries of Airbus and Boeing from receiving the support.

“The arrangement is unfair,” said British Airways Chief Executive Willie Walsh in an interview. “It clearly gives an advantage to those carriers that can access export credit.”

Export credit consists of loans or loan guarantees extended by a government to foreign buyers of the country’s products and services. Britain and the U.S. created the system decades ago to boost overseas sales and help developing economies.

Most countries now offer such credits, and airplanes are a major target. The U.S. Export-Import Bank, for example, funded $8.6 billion of Boeing’s foreign sales in the bank’s recent fiscal year, ended Sept. 30.

Airlines in the lobbying push say guarantees mean their rivals enjoy lower costs. Several participants cited the example of Irish budget carrier Ryanair Holdings PLC, a major Boeing customer and one of the biggest users of U.S. Ex-Im Bank guarantees. Ryanair competes directly with Britain’s easyJet PLC and Germany’s Air Berlin Group, neither of which can tap export credit.

Air Berlin and easyJet said they are among the nine carriers in the lobbying effort but declined to comment. Ryanair Finance Director Neil Sorahan denied the company has an unfair advantage.

U.S. carriers also can’t use export credit financing for Airbus and Boeing orders, but none is yet part of the protest. That is partly because all U.S. airlines are restricted, so there is less distortion within the U.S. than within Europe.

Still, officials from the nine European carriers said they hope to enlist U.S. airlines, which face competitors from the Middle East, Latin America and Canada that use export credit.

The European carriers last month sent a letter to their governments and EU trade officials spelling out both their grievance and a proposed resolution, say executives involved in the lobbying campaign. The proposal calls for opening export credits to all airlines world-wide, while limiting all carriers to funding at most 20% of their fleets with the guarantees. The carriers said officials are still assessing the issue.

Several of the carriers involved previously complained that export-credit financing distorts the airplane market and still argue that ideally it should be stopped. But they say advocating its elimination now is unrealistic, so instead they are pressing for equal treatment. They hope that by organizing many of the world’s biggest airlines in this push, they can make a stronger point.

The home-market rule is an unofficial and nonbinding agreement struck between the U.S. and EU in 1986 to level the playing field between Boeing and Airbus. Both sides have adhered to it because export credit was long used mainly by weak carriers in emerging markets.

Financial markets in the five home countries, meanwhile, were highly developed and carriers could arrange commercial loans at rates below the cost of government-backed borrowing.

The issue has become a sore point since the global credit crisis hit and commercial rates to fund jetliner purchases soared. Carriers from highly developed economies—including oil-rich Norway and the United Arab Emirates—joined airlines from less-developed countries in aggressively tapping export credits.

U.S. Ex-Im Bank Vice President Bob Morin, at a conference on aviation finance in Dublin last month, noted that export credit agencies’ avoidance of the five home countries means they “have ceded 45% of the world’s aircraft market to private financing, which is a good thing.” Mr. Morin and counterparts from Europe said that changing the home-market rule would be difficult, in part because the agencies don’t finance domestic sales.

Giving the U.S. and the four European countries access to export credits could significantly increase the amount of funding the government agencies do for jetliners—a shift many officials say they don’t welcome because it would be expensive and airplanes already dominate their portfolios. Other assets they finance include farm machinery, medical equipment and power plants.

Officials from Boeing and Airbus, a unit of European Aeronautic Defence & Space Co., declined to comment.

Marc Verspyck, senior vice president for finance at Air France, said that export guarantees allow recipients to place larger orders than they otherwise could, which in turn allows them to bargain down prices by “a couple of million euros” per plane. “For an airline buying 10 or 15 aircraft a year, it’s a lot of money,” Mr. Verspyck said.

Export credit guarantees are also “crowding out” loans to airlines that don’t have government support, because banks prefer lending to airlines with state guarantees, said Ignacio De Torres, finance director at Spain’s Iberia Lineas Aereas de Espana SA.